Activity Based Costing

P4-5A (a-c)

Hy and Lowe is a public firm that offers two primary services, auditing and tax return preparation. A controversy has developed between the partners of the two service lines as to who is contributing the greater amount to the bottom line. The area of contention is the assignment of overhead. The tax partners argue for assigning overhead on the basis of 40% of direct labor dollars, while the audit partners argue for implementing activity-based costing. The partners agree to use next year's budgeted data for purposes of analysis and comparison. The following overhead data are collected to develop the comparison.
Activity Cost Pool Cost Driver Estimated Overhead Expected
Use of Cost Drivers Expected Use of
Cost Drivers per Service
Audit Tax
Employee training Direct labor dollars $216,000 $1,800,000 $1,000,000 $800,000
Typing and secretarial Number of reports/forms 76,200 2,500 600 1,900
Computing Number of minutes 204,000 60,000 25,000 35,000
Facility rental Number of employees 142,500 40 22 18
Travel Per expense reports 81,300 Direct 56,000 25,300
$720,000

Using traditional product costing as proposed by the tax partners, compute the total overhead cost assigned to both services (audit and tax) of Hy and Lowe.
Overhead assigned to audit $

Classify each of the activities as a value-added activity or a non-value-added activity.
Activity
Employee training

Typing and secretarial

Computing

Facility rental

Travel

Solution Summary

Your tutorial shows the computations needed (click on cells to see the computation). The response indicates which costs are value-added and which are non-value added and the reason for both classifications.